The Lottery of Birth Place and Time

9 May 2015

by SAMI KARAM

“When I attempt to find a simple formula for the period in which I grew up, prior to the First World War, I hope that I convey its fullness by calling it the Golden Age of Security.”

Thus begins the autobiography The World of Yesterday in which the Austrian author Stefan Zweig, born in 1881, recounts his early life in Vienna at the height of the Belle Époque. It was a time of high culture, of prosperity, and of people who believed that war was forever relegated to the past. Then came the shock of WW1, the breakup of the Austro-Hungarian empire, the difficult inter-war period, Zweig’s own forced exile, the horrors of WW2, and finally death. Zweig and his wife committed suicide in Brazil, far from Vienna and very far from the Belle Époque, in early 1942 at a time when the Nazis still looked unbeatable.

There was a life that started and was lived in the sun and with infinite promise for the first 33 years and that slid gradually to ultimate oblivion in the subsequent 27 years. The future is nothing if not unknowable. It turns out that an attempt to extrapolate it from the present can be a foolish exercise, even for someone living in the capital of Austria-Hungary at the zenith of its glory. The path of life is nonlinear.

That is useful to remember when pondering Warren Buffett’s assertion in 2012 that children born in the US are the luckiest people in the world. That showed Buffett’s legendary optimism and his strong faith in the future of the United States. Considering that life expectancy is now about 80 years, this meant that Buffett saw the US as the most peaceful and prosperous country for the remainder of the 21st century.

It is true that adults now living in the United States have been among the luckiest people in the world. By the random lottery of birth, every American living today has found himself in one of the freest, most prosperous countries in human history. Since the birth of the nation 239 years ago, it was often (though not always) luckier to be born here than in any other country on the planet. So if we compare people of the same generations across time, the US-born citizen usually fared better, at least on the peace and prosperity measures if not on all dimensions of the human experience.

But what about the US baby born today vs. the US baby born one hundred years ago, or fifty years ago? When you approach the question from this angle, you can understand Buffett’s optimism. The timing of his birth in 1930 was nearly perfect.

Many unemployed and destitute parents looked at their children in the early 1930s and wondered “my poor child, what will become of you?” As fate would have it however, these children turned out to be the luckiest generation in history.

A baby born in 1935 may have experienced some difficulties in his early years because of the Depression but he was too young to remember much. He was also too young to fight in WW2 which started when he was four and ended when he was ten. In his teen years, the US economy started its long prosperous post-war boom. He was too young at fifteen to fight in the Korean war and too old in his early thirties to be drafted for Vietnam.

ChildofDepression

Children of the Depression: Things improved later on.

The economy enjoyed a prosperous run from the time he entered the work force until the first oil crisis of 1973 at age 38. He muddled through in his early forties until the Reagan boom started in 1982. That is when he entered a second long prosperous run from age 47 to age 65 in the years 1982-2000. He retired at 65 in the year 2000, then enjoyed his last fifteen years and died this year (assuming a life span of 80 years).

Buffett was born in 1930 and his life span is close to that of someone born in 1935, which explains his strong optimism.

But a ten year difference in either direction, a birth in 1925 or 1945 would have resulted in a different outlook on life. The child born in 1925 remembers the Depression, went to war in WW2 and saw his sons leave for Vietnam. The child born in 1945 was himself drafted for Vietnam but then enjoyed a nice economic run starting in his late thirties until well into his fifties and perhaps until today at age 70.

For an even sharper contrast, consider also a US baby born in 1899. To begin with, his life expectancy was only about 45 years, significantly lower than the 80 years expected for today’s baby. At eighteen, he was drafted for WW1. He witnessed first-hand the war in Europe and lost many friends. At age 30, the stock market crashed and the Depression started. At age 40, WW2 started and his sons went to war. At age seventy, if he was still alive, his grandsons went to Vietnam. It would be understandable if this person felt less positive about future life events than his counterpart born in 1935.

Now consider this man’s contemporary born in Belgium or Germany in 1899. It is the same timeline and the same trials but with far greater impact. His country was destroyed when he was in his teens and destroyed again when he was in his early forties. In between, he struggled with a severe economic depression, with hyperinflation and the rise of Nazism. The war ended when he was 46 and he felt beaten down and defeated. Then things improved gradually, though he lived with the threat of a Soviet invasion until he died. There was good reason for this man to be circumspect about the future.

The time and place of one’s birth are a random lottery. Some generations and nationalities have been far luckier than others and a shift of one decade can significantly impact one’s outlook on life. Which brings us back to the original question: How lucky is a US baby born today?

Buffett’s statement may prove accurate in relative terms. The US faces many challenges in the next few decades but they seem more manageable than the challenges faced by other nations. But what about comparing today’s baby to babies of previous generations? Is he luckier or less lucky? Difficult to say because the future is unknowable. What is certain is that generational luck is real and there will be some future generations which are far luckier and others far less lucky than the one born today.

Among the challenges faced by the current generation are the declining growth of the US population and rising dependency ratio for the next few decades. These demographic factors made for steady economic tailwinds for Buffett’s generation but they will turn into important headwinds for current generations. See related readings below.

In the examples above, the unlucky child of 1899 was born during the Gilded Age and the lucky child of 1935 was born during the Great Depression. It is tempting to see an inverse correlation here, but we must resist doing so because a shift of a few years can have a large impact on one’s life story. Still, a key conclusion is that being born, like Stefan Zweig, in a prosperous place at a prosperous time is no guarantee of a wonderful future existence. Conversely, being born in desperate times does not consign one to a life of unending trials.

Related readings:

It’s the Demography, Stupid

The Economy’s New Boss: Demographics

Is America Heading Towards Zero Population Growth?

Posted in Demographics, Dependency Ratio, Economy, United States, US Economy | Leave a comment

FT: China Faces End of ‘Migrant Miracle’

6 May 2015

The Financial Times describes China’s changing demographics in this new video. Two important changes are a reversal in the dependency ratio (previously discussed here on this site) and a slowdown or end to the ‘migrant miracle’.

Posted in China, Demographics, Dependency Ratio, Urbanization | Leave a comment

Why is GDP Growth so Weak?

29 April 2015

by SAMI KARAM

A preliminary reading of US GDP for Q1 2015 came out today at +0.2%, below the 1% expected by economists. The severe winter weather undoubtedly played an important role and the economy may experience a strong rebound in Q2 and Q3 as it did last year (2014 Q1: -2.1% Q2: +4.6%, Q3: +5%). But the recovery since 2009 remains weak compared to preceding ones. As noted in various posts on this site, US demographics are partly responsible.

As shown in the table, in the 23 quarters since the recession ended, this recovery has only seen 7 quarters of 3%+ growth, while the two previous recoveries, after the 1991 and 2001 recessions, saw 13 and 12 quarters of 3%+ growth.

GDPQuarters (1)

During the two previous recoveries, population growth averaged 1% per year but in the current recovery, it has averaged 0.7%. More important, the number of Americans aged 30 to 60 grew steadily from 1978 to 2005 but it has been flatlining at about 122 million people since 2005 and will continue to do so until 2020.

These two factors explain why this recovery has seen fewer strong quarters than those of the 1990s and 2000s.

Related posts:

It’s the Demography, Stupid

The Economy’s New Boss: Demographics

Is America Heading Towards Zero Population Growth?

Posted in Demographics, Dependency Ratio, Economy, United States, US Economy | Leave a comment

Advocate of Early Detection: Podcast with Cardiologist Dr. Michel Accad

22 April 2015

by SAMI KARAM

Cardiologist Michel Accad advocates early testing for detection of heart disease.

“We do have very robust technology, non-invasive technology that is simple to use and reliable and that has been established for a long time, to try to detect heart disease before it actually causes any problems. Most of the time when heart disease becomes manifest with symptoms or sudden cardiac arrest or a heart attack, it has been present for many many years before that time. So there is an opportunity to make a diagnosis that is very specific.”   Dr. Michel Accad, Athletic Heart of San Francisco.

Demography is one of the recurrent themes at populyst. In America Heading towards Zero Population Growth, I wrote that the population of the United States is growing at a slowing rate and that, except for immigration, it will not grow at all in the 2030s and 2040s. This prediction may however come into question if US life expectancy increases significantly in the next 20 years.

For this and other reasons, it is useful to periodically examine the progress being made in health and medical practice.

Heart disease remains the number one killer in the United States, accounting for 611,000 of the 2.6 million deaths in 2013. Strokes were responsible for an additional 129,000 fatalities, which means that cardio-vascular ailments led to 29% of all US deaths. By way of comparison, cancer in its various forms accounted for 23% of US deaths.

Death by heart attack is largely an older person phenomenon. According to the Center for Disease Control (CDC), as many as 40% of fatal heart attacks strike people aged over 85 and only 8% strike people aged under 55. This means that a hypothetical increase in US life expectancy, which currently stands at 79 years of age, must probably be accompanied by a measurable reduction in heart disease.

The table, compiled from CDC data, shows the percentage of heart disease and cancer fatalities per age group.

Heart v Cancer

Detection and prevention are seen as essential ways to fight back against cancer. It has become widely accepted that after a certain age, people should undergo routine testing for detection of some cancers even if they appear on the surface to be completely asymptomatic. Some such tests are mammograms and colonoscopies. It is important to note that these tests are most often covered by insurance, a factor which certainly raised their adoption among patients and their doctors.

By contrast, historically, the approach to detection of heart disease has relied primarily on a nebulous review of the usual risk factors, mainly diabetes, blood pressure, cholesterol, smoking, and their frequently attendant obesity. More recently however, a growing number of cardiologists have started advocating proactive testing via CT Scans (aka CAT Scans) of all people over 45 or 50.

MichelAccadPhoto

Michel Accad, MD.

One of the most vocal among this group is San Francisco-based Dr. Michel Accad, a practicing cardiologist who is also the founder and medical director of Athletic Heart of San Francisco.

In addition to early detection of coronary heart disease and other heart ailments, Dr. Accad also champions a more proactive approach to early detection of any risk of sudden cardiac arrest. Although relatively rare compared to coronary heart disease, sudden cardiac arrest can strike any person of any age during strenuous physical activity.

Dr. Accad’s years of experience coincided with rapid advances in technology and the two have converged today into the following messages:

1- It is a good idea for any person over the age of 45 to get a CT Scan. Because the first manifestation of heart disease can be catastrophic (one third of all heart attacks are fatal), it makes sense to try to detect the presence of any plaque in the arteries.

2- It is a good idea for any person of any age who is active in high-intensity physical activity to undergo tests designed to detect early any risk of sudden cardiac arrest.

As noted above, insurance typically covers cancer tests such as mammograms and colonoscopies. But CT scans designed to detect plaque in the arteries are not generally covered. Perhaps this is due to the fact that treatment of cancer can be far more expensive than treatment of heart disease, at least in its milder form. Dr. Accad notes nonetheless that the cost of CT scans is not prohibitive for a vast majority of patients.

I discussed all of these issues and questions of life expectancy with Dr. Accad in a podcast which you can hear through this link or by clicking the timeline below.

TO HEAR THE PODCAST, CLICK HERE OR ON THE TIMELINE BELOW:

Dr. Accad may be reached through Athletic Heart of San Francisco or through his blog.

Disclosure: Sami Karam and populyst have no business dealings with, and receive no compensation from, Dr. Michel Accad, Athletic Heart of San Francisco or any other parties named in the podcast.

Posted in Demographics, Economy, Health Care, Podcast, United States | Leave a comment

How Refinancings Fueled the Housing Bubble

20 April 2015

by SAMI KARAM

The wave of mortgage refinancing by millions of households has distorted the housing market and contributed to the 2000s bubble.

It makes sense for a household to refinance their mortgage when interest rates decline. In addition to lowering monthly payments, refinancing can be highly advantageous if home prices have risen from the time of the initial mortgage.

But are the millions of refinancings also distorting housing’s supply and demand and de facto feeding the real estate bubble? In my view, YES. I make the case below.

In essence, market prices are set at the margin when a small percentage of properties changes hands. When conditions are favorable, prices will trend upward because the supply is small and the demand is higher. But when large numbers of homeowners refinance, they are able to monetize the higher value of their homes without – and this is the key point – adding their homes to the overall supply. When a household refinances their mortgage and takes cash out in the process, they are liquidating part of their property through a private transaction without adding to the official supply.

As an example, say a household has a $400,000 mortgage on a $500,000 home. Five years later, the home is valued at $750,000 and interest rates have dropped from 6% to 4%. The household decides to refinance and to maintain its monthly payment at the same level. Because interest rates are lower, it is able to increase the loan from $400,000 to about $500,000 without increasing its monthly payment. By now, the principal on the old mortgage has dropped to $375,000 and the owner can extract $125,000 in cash during the refinancing process. This amount is the difference between the new mortgage $500,000 minus the principal outstanding on the old mortgage $375,000. So far so good.

But what happened to the homeowner’s equity in his home? On the eve of refinancing, the owner’s equity in his home was $750,000 – $375,000 = $375,000, equivalent to 50% of the new market value.

After refinancing, the owner owes $500,000 and his equity has dropped from $375,000 to $250,000 ($750,000 market value – $500,000 new mortgage), equivalent to 33% of the new market value.

Because the owner now has $125,000 of extra cash, you could say that he “sold” 17% (50%-33%) of his home equity for $125,000. The owner was able to sell one sixth of his house without subjecting his transaction to the scrutiny of the market and without adding to the official supply. This is not a big issue if only a few people refinance their mortgage, but it could, and probably did, distort the normal mechanism of supply and demand when millions of people refinance.

Through refinancing, a large number of households have monetized their home values (or fractions thereof) through private transactions. Had there been an open liquid supply and demand market where existing homeowners actually sold 17% of their homes, the values of all properties would have been reset at lower levels, owing to the existing homes fractional sales.

Further exacerbating the distortion, the household may have taken that $125,000 cash and made a down payment on a second home, giving a further boost to home prices. So, a transaction figure, $125,000, which would have depressed prices under normal supply and demand conditions ended up pushing prices higher.

Screen Shot 2015-04-10 at 3.35.48 PM (2)

Putting this in the right context, we see in the chart above that the volume of existing home sales in the US now has an annual run rate of approximately 4.8 million units. According to the US Census bureau, there are nearly 133 million housing units in the country, which means that 3.6% change hands every year. So the market value of all residential property in America is determined by the marginal 3.6% that transact annually. Yet, using the model above, if we said that 10% of homeowners “sell” say 10% of their homes by refinancing, that would amount to an additional 1.33 million homes sold or a 28% increase which should have been added to the supply, had the fractional sale occurred in the open market rather than through a private transaction between owner and lender.

The general issue is that 20% or more of transactions took place in private deals between owners and lenders without any competitive bidding or the disciplining effect of supply and demand. It is a fair bet that without these refinancings and private deals, the real estate market could have avoided the bubble of the 2000s decade and could skirt the new bubble now threatening in some cities.

Other populyst posts on housing and real estate:

Manhattan Real Estate: A Conversation with Lisa Larson

New Home Sales: Better but Still Historically Weak

US Demographics and Housing

Posted in Economy, Housing, Real Estate, United States, US Economy | Leave a comment

Manhattan Real Estate: A Conversation with Lisa Larson

14 April 2015

Sami Karam speaks with Manhattan’s Lisa Larson, a licensed associate real estate broker with Warburg Realty and a REBNY Deal of the Year award recipient. Topics include the state of the residential market and the boom in supertall tower construction, from the real to the surreal.

LisaLarson

“I get asked almost daily: ‘How is the market? What is happening in the market?’ And increasingly, it is getting much harder to define the market as a whole. So I always say: ‘Which market are you talking about?’ The super tall and skinny market [of new high-rise towers in Midtown], we read about every day. It is exciting and we see the towers from every angle. But that is not really the market that most of us live and work in, and buy and sell in. What really makes this job so exciting to me is that there are so many different sub-markets in this city.”   Lisa Larson, Warburg Realty.

TO HEAR THE PODCAST, CLICK HERE OR ON THE TIMELINE BELOW:

Lisa Larson can be reached at Warburg Realty or through her website.

Disclosure: Sami Karam and populyst have no business dealings with, and receive no compensation from, Lisa Larson, Warburg Realty or any other parties named in the podcast.

Posted in Economy, Manhattan, New York, Podcast, Real Estate, United States, US Economy | Leave a comment

New Home Sales: Better but Still Historically Weak

24 March 2015

by SAMI KARAM

New home sales for February were stronger than expected, at an annualized pace of 539,000 units vs. 465,000 expected. This is good news because it is the highest number since early 2008. However, the chart below shows that we are still dealing with a depressed single-family housing market.

Screen Shot 2015-03-24 at 10.30.11 AM (2)

First, it is clear that we are very far below the peak recorded near 1.4 million in the mid-2000s. Second, if we dismiss that period as an irrational bubble, it is still a fact that a 539,000 reading is in the bottom half of the historic range of 400K-800K. In fact, if we ignore recessionary periods (shaded areas), new home construction has not been this low since the 1960s when the US population totaled under 200 million vs. about 320 million now and when household size was larger than it is today.

It is true that multi-family construction is now more prominent than in the past and that it mitigates the sluggishness in single-family construction. As seen below, multi-family housing volumes now exceed the high preceding the 2008 crisis.

Screen Shot 2015-03-24 at 11.04.43 AM (2)

But if we use a back of the envelope approach and use a figure in the low 300,000 multi-family annual units as an historic average, we could say that the last multi-family reading is about 150,000 units above average. We could then argue that these 150,000 were ‘shifted’ from single-family homes. (That may be a generous assumption, considering that a large share of these multi-family buildings are destined to be rentals. Nonetheless the higher demand for rentals can also be considered a secular ‘shift’ that should be counted.)

Without this shift in living preferences, we could then argue that single-family sales would have been about 150,000 higher and closer to a 700,000 annual pace. That is a much better figure than 539,000 but still not very robust compared to the past, given low interest rates, the growth in population and the decrease in household size. In my view, keeping these factors in mind, an adjusted figure north of 800,000 single-family units would be closer to the historic norm. We should therefore be looking for a monthly report of at least 650,000 single family homes before we can talk about a return to normal.

In US Housing and Demographics, I made an argument three years ago that the housing market would be weak until at least 2020 because of adverse demographics. So far, it looks like the recent data supports my thesis. Homebuilder stocks have risen since then. This is based in part on optimistic anticipation of greater home sales, and in part on the fact that homebuilders have been quite adept at identifying and directing their efforts at higher growth areas of the country.

 

Posted in Analysis and Opinion, Demographics, Economy, Housing, Sami Karam, United States, US Economy | 2 Comments

Ratio of Gold to S&P 500

6 March 2015

by SAMI KARAM

The ratio of the price of gold to the S&P 500 shows two notable extremes, which are made evident by the log-scale chart below. The first was a reading of 6.1 in January 1980 when gold spiked up to $850 per ounce and the S&P 500 was struggling to shake off the 1970s syndrome of “death of equities”, “misery index” and “malaise”. The second was 0.19 in July 1999 and subsequent months when gold hit a multi-decade low of $252.8 while the S&P 500 soared on the wings of the Nasdaq bubble.

A more recent high of 1.5 was in September 2011 when gold reached an all-time high of $1,895. The ratio has since retreated to 0.56 today which is a level not seen since the stock market highs of 2007.

(click chart to enlarge)

Sources: Kitco, S&P, populyst.

Sources: Kitco, S&P, populyst.

It should be noted that the average for the ratio, since gold started trading freely in 1968, is 1.18, which means that it is now well below the average. Reversion to the mean here would mean the S&P 500 falling by half or gold doubling, or various combinations such as for example the S&P 500 falling by 35% while gold rises 35%.

There is no doubt that there is some exuberance in the stock market, but it does not necessarily follow that the ratio should quickly revert to its long-term average. After all, one may ask, why is this ratio even relevant? It is a question that is justified if you believe that gold should only reflect inflation expectations. Then it would rise or fall with inflation fears.

But in reality, there is more complexity in what drives the price of gold. Inflation numbers were similar in the 1990s and 2000s but gold fell in one decade and rose in the other. Therefore, inflation alone is not enough to explain its behavior.

What drives the price of gold will be the subject of another post. But here it is enough to say that it is driven in part by several factors which are the inverses of those that drive the S&P 500. It makes sense therefore to keep an eye on the ratio.

Posted in Analysis and Opinion, Economy, Gold, Inflation, Sami Karam, Stock Market, United States | Leave a comment

The Case for Agricultural ETFs: A Conversation with Sal Gilbertie

23 February 2015

(also published on Seeking Alpha)

by SAMI KARAM

“It is really important to have ags in your portfolio. Most people have gold and most people have oil. The fact that they don’t have ags is actually quite a mystery.”    Sal Gilbertie, President of Teucrium Funds.

TO HEAR THE PODCAST, CLICK HERE OR ON THE TIMELINE BELOW:

As Sal Gilbertie would have it, CORN is not only the king of agricultural commodities. It is also the ticker symbol for one of Teucrium Funds agricultural ETFs. In addition to CORN, Teucrium offers three other single-commodity ETFs: WEAT, SOYB, CANE, for wheat, soybean and sugar. Each of these ETFs invests in futures and is configured to “mitigate contango and backwardation” and to track the price of its underlying commodity. A fifth ETF, with ticker TAGS, tracks an equally-weighted basket of corn, wheat, soybean and sugar.

I recently had a conversation with Gilbertie who is President of Teucrium. Gilbertie cut his teeth in the 1980s as a commodities trader at Cargill and later at other large institutions. His case for investing in agricultural commodities is three-fold:

  • the long-term: growth in demographic demand in emerging markets.
  • the timeless: diversification away from the S&P 500 and from gold.
  • the short-term: agricultural commodities are now significantly undervalued relative to gold.

1- Long-term Demand and Supply

Demand for agricultural commodities is expected to rise steadily in the decades ahead due to 1) the growth of the global population currently from 7 billion people to over 9 billion by 2050 and 2) the rise in living standards and concomitant improvement in diets in emerging markets.

The table below shows future population estimates per the United Nations’ medium variant estimates. It should be noted that this medium variant assumes a big decline in total fertility rates (TFRs, number of children per woman) in India and Sub-Saharan Africa. In the event that TFRs do not decline as fast as expected, the population growth in these countries would be even greater.

Asia and Sub-Saharan Africa will show the biggest jump in population and in demand for basic food stuffs. Note in the table that Sub-Saharan Africa is forecast to contribute half the population growth between today and 2050, and as much as 81% of the growth between today and 2100.

Screen Shot 2015-02-20 at 5.53.58 AM

It is not difficult to conclude from these figures therefore that Sub-Saharan Africa will require more than a doubling of food supplies in the next 35 years, a significant challenge at a time when it is still trying to eliminate hunger in many countries.

Of course, supply is also growing but it is generally more volatile than demand due to periodic crop failures (from floods, droughts etc.) in one or another region of the world. Supply is also constrained by two factors: lower yields from farms in emerging markets and poor infrastructure in the regions of the world which have the largest unused acreages of arable land.

In 2012, the African Union Commission (AUC), the United Nations’ Food and Agriculture Organization (FAO) and the Brazil-based Lula Institute joined forces to “eradicate hunger” in Africa. At the time, the Chairperson of the AUC stated the following [my emphasis]:

“Food security is one of the key priorities of the African Union. Africa has the potential to increase its agricultural production given that almost 60 percent of the arable land in the continent is still not utilized. This enormous potential can make a real difference to improve our agricultural production and food security. It is time to move beyond subsistence agricultural production and consider ways of eventually embarking on agro-industrial production.”

More generally, looking at the global picture, Sub-Saharan Africa is believed to have the largest reserves of untapped arable land. As promising as this may be, massive investments in technology, infrastructure and logistics will be needed before new farm land can yield significant amounts of grain that can be delivered to consumers.

With regards to agricultural yields, an FAO report released in 2002 stated:

“Global cereal yields grew rapidly between 1961 and 1999, averaging 2.1 percent a year. Thanks to the green revolution, they grew even faster in developing countries, at an average rate of 2.5 percent a year. The fastest growth rates were achieved for wheat, rice and maize which, as the world’s most important food staples, have been the major focus of international breeding efforts. Yields of the major cash crops, soybean and cotton, also grew rapidly.”

For example, wheat yields in developing countries have nearly tripled from 1,000 kilograms per hectare in 1968 to over 2,600 now.

To sum up, supply will keep up with demand but only if yields improve at existing farms and if new infrastructure is put in place to service new arable land.

2- Timeless Diversification

Agricultural commodities are less correlated to the stock market than gold and should therefore be considered for diversification at any time. In recent decades, gold has drawn tens of billions in portfolio investments mainly because it was seen as a hedge against possible dislocation in financial markets.

Screen Shot 2015-02-20 at 3.57.31 PM

Gold delivered on its promise as an effective diversification asset in 2008-2011, outperforming stock markets by a wide margin during the financial crisis and its aftermath. Although it has retreated from its 2011 highs in recent years, gold is still a significant outperformer of all leading stock indices in the decade and a half since it hit bottom in 1999. See chart above.

Of course, gold grossly underperformed stocks in the 1990s, but the subsequent decade proved that there can be prolonged periods of time when it beats the popular indices by a very significant margin, notwithstanding comments by some market participants who deride it as barbaric or uncivilized. The pragmatic reality is that, barbaric as it may be, gold sometimes outperforms stocks for ten or fifteen years.

Screen Shot 2015-02-20 at 2.47.14 PM

Still, if we have shown that diversification into commodities is desirable, the chart above from Teucrium’s web page argues that agricultural commodities are even better diversifiers than gold because they have a lower historical correlation with the S&P 500 than gold does. Through the 20-year period 1995-2014, sugar, corn, wheat and soybean have all had a lower correlation to the S&P 500 than has gold.

3- Short-term Valuation

The ratio of gold to corn was in September 2014 at its highest level since gold started trading freely 38 years ago. It stands today at nearly twice its long-term average. Gilbertie says that, on average since 1976, an ounce of gold has purchased 165 bushels of corn. Last September, an ounce of gold could buy 377 bushels and today it can buy around 300 bushels, still nearly twice the long-term average.

The ratios of gold to the other grain commodities and to sugar tell a similar story.

Screen Shot 2015-02-20 at 5.27.15 AM

Thank you for reading. My conversation with Gilbertie includes more original insights about the mechanics of trading futures and ETFs and about the supply and demand prospects for agricultural commodities.

You can listen to the full podcast here:

Disclosure: The author has no contractual agreement with Teucrium and receives no compensation from Teucrium. As of the date of this posting and for at least the following 72 hours, the author has no investments in the Teucrium Funds.

Disclaimer: This article represents the author’s best faith efforts at presenting true facts. Nonetheless, despite the author’s best diligence, the article may include unintentional errors. Do your own work, read more research and draw your own conclusions before you decide to trade.

Posted in Africa, Agriculture, Analysis and Opinion, Asia, Commodities, Demographics, Economy, Emerging Markets, Food, Gold, Hunger, India, Podcast, Sami Karam, Sub-Saharan | Leave a comment

The BRIC and I

12 January 2015

The growth prospects of Brazil, Russia and China are dimming, while those of India are flaring.

If one is a lonely number, then ‘I’ could be a lonely letter, at least when it comes to the ‘I’ of the BRIC countries. Brazil, Russia and China all face mounting challenges in 2015 but the road ahead seems wide open for India. The main concern with this opening statement is that it seems to be the view of a large majority of observers.

Still, a majority is not the same as a consensus and certainly not the same as an extreme consensus. In investing, the consensus view is often right but the extreme consensus is absolutely and always wrong. For example, the consensus to buy tech stocks in 1997 was right but the extreme consensus to sell all non-tech and buy only tech in early 2000 was very wrong. When it comes to India, we are with the majority view, edging into consensus territory, but still far from extreme consensus. There remain enough doubters to ensure that this story still has plenty of time to play out.

Our approach to the topic is resolutely from the point of view of demographics. Demographics are not the be all and end all of an economy, but they are a very important vector, one of three very important vectors, the other two being innovation and institutional strength. Looking at the BRIC countries, the demographics of Russia and China are poor and those of Brazil are neutral. By contrast, the demographics of India, though challenging due to the large population size, could hold much promise if this huge newly created human energy can be harnessed and channelled in the right directions.

In general, the best demographic profile for an economy would be a rising population coupled with a declining dependency ratio (the ratio of dependents to workers). The increase in population means that demand for goods and services continues to grow. And the declining dependency ratio means that there is plenty of discretionary capital for consuming and for investing.

The US, Europe and China were in this sweet spot until six or seven years ago. Indeed, much of the world was in this sweet spot, a fact which largely explains the enormous creation of wealth and improvement in living conditions for billions of people in the past few decades. Things got more challenging in the middle of the last decade when dependency ratios in several countries bottomed out and started to rise.

BRIC Countries Total Dependency Ratios

BRIC Countries Total Dependency Ratios

We can’t blame the 2008 crisis on demographics alone. There were many abuses and excesses in the system which brought about the crisis. But it is worth noting that the crisis struck about the same time that a big reversal in demographics was taking place. A crisis would have come any way but instead of 2008, perhaps it would have come in say 2012 if the dependency ratio had bottomed four years later than it did.

Nor should anyone be surprised that Japan peaked in the late 1980s and has been struggling since then. Its dependency ratio bottomed in the early 1990s.  Or that China saw a huge boom since 1980 after it introduced its one-child policy, thus engineering a very steep decline in its dependency ratio. Or that the US recovery has been slow, given that its population growth has slowed down and its dependency ratio has been rising.

USA, Europe, Japan Total Dependency Ratios

USA, Europe, Japan Total Dependency Ratios

As shown in the first chart above, India is the only BRIC country with a declining dependency ratio between now and 2030. Russia and China’s are already rising and Brazil’s will bottom and rise by the end of this decade. Russia seems to be in the worst shape since it has both a declining population and a rising dependency ratio.

Finally two quick words on the other big vectors of economic growth: innovation and institutional strength. Innovation in Brazil, China (ex-Taiwan) and Russia has been slow and cannot be considered a factor in future growth. There was plenty of excess capital to invest in new businesses when the dependency ratio was declining in all those countries but it went instead into real estate and other unproductive investments. Innovation has been slightly better in India and could take a big leap forward with more capital investments in the decades ahead. India also has an immeasurably greater competitive advantage compared to the other BRIC members: its population speaks English.

Institutional Strength can be the subject of endless debate, especially if we try to draw comparisons across countries. All emerging countries have to make significant progress on this account.

Posted in Analysis and Opinion, Brazil, China, Demographics, Dependency Ratio, Economy, Europe, European Union, India, Japan, Russia, United States